A Roadmap for Refunds

Following up on information provided in our July 2013 and August 2013 newsletters, this article continues with our efforts to keep our readers informed of ongoing changes set in motion by the US Supreme Court’s ruling in the U.S. v. Windsor case. That decision negated Section 3 of the Defense of Marriage Act (“DOMA”), thereby allowing same-sex married couples to be recognized as married for a number of purposes, including, for the first time, numerous tax laws. Additional guidance has been expected that would help us implement these changes, and on September 23 of this year, the IRS issued Notice 2013-61, the subject of this article.

Many married same-sex couples historically were denied certain tax benefits available only to spouses, such as pre-tax health insurance for a married partner. Instead, same-sex couples were taxed on those benefits (and in many cases, due to required “matching,” their employers were, too). The reversal in Windsor created the opportunity for refund of such overpaid taxes, and Notice 2013-61 explains the steps.

More specifically, Notice 2013-61 provides guidance for employers and employees to make claims for refunds or adjustments of overpayments of Federal income tax withholding (employment taxes) and Federal Insurance Contributions Act (FICA) taxes; provides special administrative procedures available to employers to claim refunds or make adjustments of overpayments of FICA and employment tax paid with respect to same-sex spouse benefits for 2013; and provides a special administrative procedure that may be used with respect to overpayment of FICA taxes for years before 2013.

As a reminder, Revenue Ruling 2013-17 requires an employer to treat same-sex spouses as married beginning on September 16, 2013. In addition, an employer may choose to apply Notice 2013-61 retroactively. For years that remain open – 2010, 2011, and 2012 – tax refund claims may be warranted to recover taxes that were remitted with respect to certain benefits treated as taxable when provided by the employer to the employee’s same sex spouse. Such benefits include:

Health plan coverage;

Qualified tuition reductions;

Meals and lodging furnished to the employee for the convenience of the employer;

Dependent care assistance; and

Certain fringe benefits, including:

employee discounts;

de minimis fringe;

qualified transportation fringe;

qualified moving expense reimbursement;

retirement planning services; and

on-premises athletic facilities.

Income and FICA taxes remitted to the federal government for compensation paid by one same same-sex spouse to the other for household employee services would likewise be eligible for refund or adjustment.

The normal procedure for amending employment tax returns is to file a Form 941-X for each calendar quarter for which a refund or adjustment exists. The optional procedures outlined in Notice 2013-61 provide a streamlined process, as follows.

For 2013 overpayments, the employer may follow either of the following steps:

Use the fourth quarter 2013 Form 941, Employer’s Quarterly Federal Tax Return, to correct the FICA and federal income tax withholdings for all of 2013 (note the employer must reimburse the employee for all FICA and federal income tax that was overwithheld in 2013 by December 31, 2013); or

File one Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct all 2013 FICA tax overpayments (note the employee must be reimbursed for the overwithheld FICA before the employer can file the Form 941-X and the employer must secure a written statement confirming that the employee has not claimed and will not claim a refund of the overpaid FICA tax).

If the employer uses option #2 for refunds of the FICA tax, the employee will request a refund of income tax withholding upon filing the 2013 individual income tax return.

For prior year overpayments of FICA taxes, employers can make a claim or adjustment for the entire year on one Form 941-X filed for the fourth quarter of the applicable year if the statute of limitations has not expired. Before filing, an employer must repay the overwithheld amount to the employee and secure a written statement confirming that the employee has not claimed, and will not claim, a refund of the overpaid FICA tax. The employer must also provide Form W-2c, Corrected Wage and Tax Statement, to the employee for each applicable year.

For prior year overpayments of income tax withholding, the employee must file a Form 1040X, Amended U.S. Individual Income Tax Return, to request a refund of the overpayment.

Notice 2013-61 provides examples and additional instructions addressing how the Forms 941 and 941-X should be completed. For instance, the employer should write, “WINDSOR” across the top margin of page one of Form 941-X.

With the release of Notice 2013-61, much of the tax-related guidance expected from the Windsor ruling has now been received. Although we will continue to share new relevant material that is provided, we encourage taxpayers who overpaid FICA or withholding tax to file refund requests to neutralize this previous disparity.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.